IFCA MSC Bhd
(Nov 6, RM0.75)
Maintain “add” with a target price (TP) of RM1.05: IFCA MSC’s nine months of financial year 2014 (9MFY14) revenue was up 53% year-on-year (y-o-y) but net profit was up close to 700%. No interim dividend was declared, in line with our expectations. Higher-than-expected third quarter of financial year 2014 (3QFY14) profit was mainly due to its strong top-line growth, coming from domestic and China business. Year-to- date (YTD), only RM8.4 million goods and services tax (GST) jobs were completed while we are targeting 80% to 90% revenue growth from the China market this year. The company only has 100 customers in China and we understand there are 40,000 property companies in that country.
IFCA’s software business has a high operating leverage. Most of its operating costs are fixed (labour is 65% of its operating costs) and its top-line has reached the sweet spot this year. Revenue is now more than sufficient to cover its operating costs and as such, most of the revenue incremental growth should follow directly to the bottom line. This is shown by 3QFY14’s earnings before interest, taxes, depreciation and amortisation(ebitda) margin which was at 37.4% compared with 18% in 2QFY14. Its 3QFY14 revenue was up 40% quarter-on-quarter (q-o-q) at RM25.7 million.
IFCA is a net cash company with RM34.9 million or 7.7 sen net cash/share as at end-September. With limited capital expenditure (capex) spending and research and development (R&D) at only RM4 million to RM6 million annually, the company’s cash pile will continue to grow in time. In addition, by next year, we expect more of the warrants would be converted (143.3 million outstanding warrants, exercise price 10 sen and expires in February 2016) and this could raise an additional RM14.3 million for the company. We were looking for the company to move to the Main Board in 2016 but based on the expected strong 2014 net profit, IFCA could be looking to move to the Main Board next year instead of 2016.
We raise our FY14 to FY16 earnings per share by 36% to 100% to reflect stronger top-line growth and TP also rises based on unchanged 21 times 2016 price-earnings ratio in line with domestic peers. The stock remains an “add” with potential catalysts such as record 3QFY14 net profit and the move to Main Board in 2015. — CIMB Research, Nov 5
This article first appeared in The Edge Financial Daily, on November 7, 2014.